A publication from the Smith Institute says charities get treated as no different from businesses when contracts are awarded

Meals on wheels: a typical public sector service

The public sector has missed the "wider social significance" of charities by treating them as no different from businesses when outsourcing services and awarding contracts, according to a new report from the left-leaning think tank the Smith Institute.

The Out of Contract report, which was produced by John Tizard, a strategic adviser and former senior executive at the outsourcing firm Capita, and the journalist David Walker, says public sector bodies should also consider providing grants to charities rather than contracting services to them.

The report sets out a number of concerns about the current outsourcing environment, particularly the role of the private sector, and suggests that public services should avoid deals with private companies where possible.

This is part of a number of recommendations made by the report, including making in-house provision the default option for all public services and implementing an immediate pause on all public service contracting, as well as root-and-branch reviews of all current outsourcing deals.

A "domesday book" listing all existing private finance initiative deals and a new body to regulate and share good practice in PFI and outsourcing deals should also be considered, the report says.

The report says that a review of contracting in this way would be an ideal opportunity to reset the relationship between charities and social enterprises and the public sector.

"At best, charities and social enterprises can innovate and experiment, doing things that councils and public bodies can’t," the report says.

"They can reach and involve communities and people alienated from or missed by public bodies. The state should respect the right of charities to say ‘no’ to taking on service provision and stick to their mission, and to campaign and challenge."

Public sector outsourcing contracts are currently valued at about £100bn a year, according to the report, which was written before the recent high-profile collapse of the outsourcing firm Carillion.

The disability charity Scope also announced last month that it had sold its care homes to a private care company – with about 2,000 staff transferring to the firm Salutem as a result – as part of a strategy to focus on advocacy, information and support.

Paul Hackett, director of the Smith Institute, said: "The report shows that this reliance on – and bias towards – private firms for public services has gone on for too long. We need a new approach based on public service values and community benefit, rather than private profiteering."

Jon Trickett, the shadow cabinet secretary, said: "Outsourcing and PFI are failed dogmatic experiments. Marketisation of public services was sold to us as efficient, with competition ensuring a good deal for the taxpayer and service users. It is clear that this is not the case.

"The present system has left the public powerless and many vital services have been contracted out to companies whose primary interest is giving shareholders the highest return. This must change."